Editorial: Government bullied banks into TARP funds

April 22, 2009

A few smaller banks have begun to repay money loaned to them under the Troubled Assets Relief Program begun with $700 billion in October when the depth of the financial crisis became apparent, and the government decided some troubled financial institutions were “too big to fail.”

But interestingly, repayment is not just a matter of writing a check or making an electronic transfer. The banks must actually get permission from the Treasury Department to repay the loans, and there are reports that it has actually refused permission to some.

This is made all the more curious by the fact that some banks were literally forced to take the money — on which they have to pay 5 percent interest that is not tax-deductible — whether they wanted it or not.

In October, then-Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke and other officials gathered the heads of the biggest banks in the country and informed them they had to accept TARP bailout funds. The stated reason was that if some banks took the money, and some didn’t, it might reflect badly on those who did. Investors might think they were in a weakened position.

Matters deteriorated when the Obama administration came into office, and populist rage about executive compensation developed. The new administration started imposing retroactive restrictions on banks that had taken TARP money, including a cap on executive pay, mandates that banks put off evictions or modify mortgages for homeowners in trouble, reductions in dividends and elimination of some employee training and morale-building trips.

Wells Fargo Chairman Richard Kovacevich complained about these restrictions in a speech at Stanford in March, at which he also called the upcoming government “stress tests” on banks “asinine.” Kovacevich also said if his bank had not been forced to take TARP money it would have been able to raise more private capital.

Wells Fargo was not alone. On March 31 four regional banks, in New York, Indiana, Louisiana and California, announced they were paying back their relatively small ($28 million to $120 million) TARP loans. Several banks in New Jersey have begun the process. But Stuart Varney, writing in The Wall Street Journal, reports that one bank with a $1 billion TARP loan has been denied permission to repay the loan because a repayment that size might make the program look bad.

Whether that’s the real reason or whether it’s because the feds can live with losing control over a few smaller banks and don’t want to give up micromanaging larger, more prominent ones, it presents a cautionary tale.

To be sure, banks and other financial institutions are among the most heavily regulated businesses in the country — which suggests heavy regulation is no guarantee of avoiding unwise risks. Regulation gives the government leverage. The big banks last October may have been in no position to repel the take-the-money-or-else bullying.

But other businesses that have a choice should think twice before asking for or accepting “help” from the government. It always comes with strings, and the strings will be more political/social engineering than economic in nature, which means they’re more likely to harm economic health than to promote it.

Next time any business is tempted to ask for or accept “help” from the government, it should remember the tale of the TARP.